Today is a solid lift, which doesn’t surprise me. I figured people would be too afraid to short stocks, what with Ben Bernanke at the helm. In recent weeks, we’ve also had Fed policy makers who had previously been deriding the inflationary atmosphere recant and state that if the conditions worsened, they would not be opposed to further action.
But today, right now, none of us knows for sure whether or not the Fed will actually intervene. That is important.
Only juveniles talk about the “probability” of outcomes in a situation like this. Listen, I’ve spent an inordinate amount of time thinking about statistics, so let me share a bit of wisdom with you now.
I’m hearing people say something along the lines of, “There’s a 25% chance that the Fed intervenes extensively, a 25% chance the Fed does nothing, and a 50% chance the Fed defers to a later time” or “10% chance Greece doesn’t default, 10% chance they default immediately, 80% chance they stave off bankruptcy until next year.”
These sorts of statements are totally meaningless, because they are not statistical. Guess what? There is a 100% probability that whatever happens is going to happen. Statistically, saying Greece has an 80% chance of default would imply that with X observations of Greece as a creditor, 80% of the time in similar situations, Greece has defaulted.
Since this is such a one off event, there is no suitable sample of data which you could possibly have to tell you that such a statement is true. So the real statistical expectation of a Greek default, or a split of the European Union, or an American Bankruptcy, or an alien invasion, is totally undefinable.
While you could argue that there exists some classical probability of a Greek default, how the fuck are you going to define that? This isn’t like counting faces on a die. And no, don’t say “…well, (humph) the bond market is telling us that there is a (Y) probability of outcome (Z)…”
No jackass, because the bond market is defined by participants, and there is no participant who could possibly have a firm handle on the statistics of these extreme events, the bond and equity markets by extension are just as lost to the true likelihood of the outcomes.
At this point, these statistical discussions are really just elaborate, technical-sounding ways for pseudo-intelligent money managers to throw out wild guesses.
The truth is, unless you have some truly uncanny information regarding the actions and thoughts of every politician, individual, and feline inside of Europe, you have no idea what is about to happen.
This means that the decisions you need to be making right now should not be based on “what the market is telling you” but rather should be founded on the size and scope of the outcomes.
What happens if a major series of European defaults gets under way? What happens if Asia slows down? What if central bankers the world over put the presses on high and start using domestic currencies to wallpaper homeless shelters?
What I’m seeing, when I ask these questions, is that there is a wild domain of solutions. Literally, a single phrase or its omission, over the next 24-36 hours, could result in the market marching 20% higher, or else doing a 180 and slamming 20% lower.
There is nothing to be gained from playing in that kind of field.
You need your back against a wall, and I do as well. So here’s what I’m recommending:
Play all ways, and keep yourself grounded. You can accomplish this by,
1. Holding names that are trading close to book value, and that aren’t overly dependent on earnings. Utilities come to mind; worse economic data will result in mark downs of assets and earnings, but cheap names will still lose the least.
2. Playing both sides of the ball. There’s no reason to bet the market is going up or down. Bet both ways and have an exit strategy when the correct path reveals itself.
3. Keep your fucking eyes open. The last gazelle gets the crocodile.
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A GAZELLE COULD NEVER KILL A CROCODILE
On another note, don’t cheap BV names lose some of their shine in an environment similar to what we saw the banks go through a couple years back?
They had all their assets marked up, high BV, but when shit hits the fan and they need money, they can’t borrow based on their faulty BV ? I realize other industries arent the same, like utilities, where BV is almost absolutely more accurate, but perhaps there are better metrics to be used? Questions from a rook to a pro
That’s true, I’m sort of assuming that right now anything that is trading close to book has probably been subjected to the test of time.
Liabilities are important. That quick bit of logic goes out the window if you’re buying up MGM.
If you want one dirt cheap, then NNA. Will require patience. Book Value north of $10, trades $3+. Dividend.
Thanks. Very logical.
Wise words to heed, thank you
great post jake,every and any angle possible,it’s dog eat dog now.
My name is Cain, drummerboy.
😉
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Well how about this for a trade…… short Canadian banks. With the spread between the overnight and the 5 year yields being at close to all time lows and the leverage ratios of all banks coming down the go forward profitability of banks has to be coming down. I am already short GS (not even sure they have a go forward business but thats another story). If you track TD, CM or RY against the XLF there has been a massive departure in the past year. Doesn’t it appear odd that companies that for the most part are the same with the exception of a border should be valued so differently? There is only so much of the profits that used to come from the loan portfolio that can be recreated via higher fees. Feels like an “accidentally high yield” situation. This doesn’t even get into the Canadian housing bubble.
Canuckistanian banks are regulated differently and have lower exposure to crap assets. They are a flight to quality, if anything.
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it depends on what you mean by quality. Their portfolios are still made up largely of residential mortgages and small business loans which will not do well in a recession either. Even if there is no recession it doesn’t appear the decreased profitability via leveraged overnight vs 5 year lending due to a flat yield curve has been priced in.